Inflation

Treasuries and gilts especially reflect unrealistic expectations that inflationary pressures will goad central banks into another 2022-style rate-hiking cycle.

Two former members of the Federal Open Market Committee said in interviews that they expect the Federal Reserve to keep rates steady amid uncertainty over the ongoing war with Iran and the resulting upward pressure on inflation.

Since the meeting, investors have rushed to price in higher rates as inflation fears have built in financial markets, though Treasuries rallied Monday after President Donald Trump said he would postpone strikes on Iranian energy infrastructure.

The Fed, European Central Bank and the Bank of England all held rates this week as policymakers grapple with the uncertain outlook for inflation and growth arising from the conflict in the Middle East.

Traders are now fully pricing in the next quarter-point rate reduction in mid-2027, and a growing chorus of Wall Street economists have also pushed their calls for the next cut further out the calendar.

This month's slump in Treasuries "is really a deleveraging dynamic," with traders liquidating long positions as they price in fewer Fed cuts and the risk of hotter inflation.

Treasury yields are up almost a quarter percentage point since the war in Iran started, while traders have pushed back bets on the timing of the Federal Reserve's next interest-rate cut and hikes.

The path of US interest rates remains in focus following the slower-than-expected US inflation print as traders fully price a Fed cut in July.

Yields across maturities declined by at least three basis points Friday, led by shorter-maturity tenors that are most sensitive to Fed rate changes.

Federal Reserve Vice Chair Philip Jefferson said in a speech Friday that long-term productivity gains brought on by artificial intelligence could compel the central bank to maintain higher rates to keep prices stable.

Federal Reserve Gov. Lisa Cook said in a speech Wednesday night that the central bank's credibility depends on its ability to bring inflation back to its 2% target.

The Bureau of Labor Statistics Thursday indicated that the Core Consumer Price Index indicated that inflation rose by only 2.7% in November versus a year ago, a pace that is the slowest rate of price increases since 2021.

Bessent spoke a week after Democrats won several key elections by zeroing in concerns over the cost of living, including housing, groceries, utilities and health care. Trump himself has rebuffed such concerns.

The Bureau of Labor Statistics released its latest Consumer Price Index reading Friday morning, showing inflation rose by 0.3% in September, slightly below August's pace. The report also found core inflation steady at 3.0%, even as shelter costs eased and gasoline prices spiked.

Federal Reserve Governor Stephan Miran floated the idea of conducting monetary policy with an eye toward the neutral rate and suggested that the president's immigration and fiscal policies will exert downward pressure on inflation.

The pressure from President Donald Trump and his allies on the Fed to slash interest rates underscores the need to retain credibility on fighting inflation, the former Treasury chief added.

Treasuries climbed across the curve, driving two-year yields down three basis points to 3.51%. Money markets almost fully priced in three Fed reductions by the end of 2025.

Investors are anticipating the annual preliminary benchmark revision of US payrolls data. Further signs of softening could further raise expectations for Fed easing.

The attention will now turn to reports on producer prices and consumer prices, due Wednesday and Thursday, for signals of how quickly the Federal Reserve will lower borrowing costs.

Debt markets globally were roiled this week as the yield on the 30-year Treasury rose to almost 5% before easing in the past two sessions.